taxation and investment

Residential rental property can be depreciated over ______ years. A. 15 B. 27 1/2 C. 31 1/2 D. 39

B

The value placed on land and buildings by a city, town, or county assessor for use in levying annual real estate taxes is a property's A. appraised value B. assessed value C. market value D. sales price

B

Which term is deducted from NOI to find cash flow? A. collection losses B. debt service C. vacancy losses D. variable expenses

B

which of the following items are tax deductible? select all correct responses A. depreciation of a new roof of a principal residence B. interest on a home equity loan C. maintenance costs on a principal residence D. mortgage interest on a vacation home E. property taxes on a principal residence

B, D, and E

A property is appraised at $250,000 and assessed for tax purposes at 40% of value. What are the quarterly taxes if the tax rate is $60 per $1,000? A. $600 B. $1,500 C. $6,000 D. $12,000

B.

Property taxes create a A. involuntary general lien B. involuntary specific lien C. voluntary general lien D. voluntary specific lien

B.

Richard is the owner of a four unit apartment building. The property is valued at $375,000. If the land is valued at $75,000, what is the basis for the depreciation calculation? A. 75,000 B. 300,000 C. 375,000 D. 450,000

B. 375,000 - 75,000 = 300,000

Property owner Jack lives in Top Town. His house is assessed at $40,000. The property tax for XYZ Schools is $60 per $1,000. What will Jack pay in property tax for the school levy? A. $1,250 B. $2,400 C. $3,200 D. $6,666

B. divide the assessed value by 1,000. $40,000 / 1,000 = 40. then multiply by the tax rate of $60 per $1,000 to find the property tax owed to the school district: 40 x 60 = $2,400

A property with a market value of $100,000 is assessed at 50%. The annual taxes are $1,250. What is the tax rate? A. $18 per $1,000 B. $25 per $1,000 C. $27 per $1,000 D. $32 per $1,000

B. first determine the assessed value is $50,000 ($100,000 x 0.050). Divide that by 1,000 to get 50 taxing units. Finally, divide the annual taxes $1,250 by 50 to get a tax rate of $25 per $1,000

Property in Joe's town is assessed at 50%. The property tax rate is $18 per $1,000. If Joe's annual taxes are $720, what is the market value of his property? A. $40,000 B. $80,000 C. $90,000 D. $130,909

B. first, you can find the assessed value by dividing the taxes by the tax rate; $720/0.018 = $40,000. Then divide the assessed value by the tax ratio: $40,000 / 0.50 = $80,000

Kent is single and sold his principal residence for $325,000. He bought the house 30 years ago for $150,000. He had selling expenses of $15,000. Kent meets all the conditions for the section 121 exclusion. What is Kent's recognized gain or loss? A. -$90,000 B. $0 C. $160,000 D. $175,000

B. since the section 121 exclusion ($250,000) is greater than the realized gain of $160,000 there is no recognized gain

Property that is not like kind but part of a like kind exchange is called A. adjusted basis B. boot C. capital asset D. qualified intermediary

B. sometimes boot is used to help equalize an exchange

If william and Liz had NOT financed the purchase of the property, but paid $150,000 cash for it and sold it five years later for $165,000, what was their return on investment? A. 9% B. 10% C. 11% D. 15%

B. they would have made a 15,000 profit on a 150,000 investment, so 15,000/150,000 = .1 or only 10%

Of these, which is MOST LIKELY to be paid for with a special assessment? A. new fire engine B. new sports stadium C. sewer repair D. teacher's salaries

C

When transacting a 1031 exchange, which of the following would NOT be eligible for the tax benefits? A. a 200 acre farm for a warehouse B. an apartment building in one state for a strip mall in another state C. a personal residence for a single family rental home D. a vintage sports car for a sailboat

C

A property is appraised at $150,000 and assessed for tax purpose at 50% of value. What are the annual taxes if the tax rate is $80 per $1,000? A. $600 B. $1,500 C. $6,000 D. $12,000

C. First determine the taxable assessed value: 150,000 x 0.50 = $75,000. Then divide by 1,000 and multiply by $80 to get $6,000. which is the annual tax: $75,000/1,000=75 $1,000-taxing units; 75 x 80 = $6,000 ( or $75,000 x 0.080 = $6,000)

Investor Tony buys a rental house for $120,000. It rents for 1,200 a month, assuming no vacancy. It has annual operating costs of 1,800. What is his capitalization rate on this property/ A. 8.3% B. 9.5% C. 10.5% D. 11.2%

C. find the potential gross income 1,200 x 12 months = 14,400. since there is no vacancy losses, this is also its EGI. Find the net operating income 14,400 - 1,800 = 12,600. use the IRV formula to find the cap rate: 12,600 (income)/ 120,000 (value) = 0.105 (rate) or 10.5%

Of these assets, which is the LEAST illiquid? A. certificates of deposit B. gold C. real estate D. savings bonds

C. the full value of a real estate investment property is usually not immediately convertible to cash without some loss of total value

Doris owns a four unit apartment building. The rent on each unit is $500 a month. She averages 10% vacancy and collects $500 a year from the coin operated washer and dryer in the building's basement. What is the potential gross income for Doris's building? A. $21,600 B. $22,100 C. $24,000 D. $24,500

C. the potential gross income is simply the total of the rent that could be collected before losses are subtracted and miscellaneous income is added ( 500 x 4 x 12 = 24,000)

Tony purchased a bigger warehouse for his expanding wholesale food distribution company at a cost of $500,000. The land on which it sits is valued at $150,000. What is the amount that Tony will be able to deduct next year as depreciation? A. 3,846 B. 5,128 C. 5,454 D. 8,974

D

Which is a characteristic of a pro forma statement but is not a characteristic of an operating statement? A. documents a property's performance B. illustrates total income and expenses C. looks for net operating income D. provides hypothetical data to assist in making decisions

D.

Which of these investment types do you think is the most liquid? A. antique furniture B. commercial real estate C. IRA (individual retirement account) D. shares of stock

D.

the most important component in determining cash flow is A. appreciation B. depreciable value C. interest D. net operating income

D.

property value - current balance of liens =

Equity

capitalization rate

a percentage rate of return used by investors to calculate the present value of future income. Used for an income approach to appraisal. Also called rate

property manager

a person hired by a real property owner to administer, market, merchandise, and maintain property, especially rental property

special assessment

a tax levied only against properties that benefit from a public improvement (sewer or street light) to cover the cost of the improvement; creates a special assessment lien (an involuntary lien)

ADA ( americans with disabilities act) is

a wide ranging federal civil rights law, signed in 1990, requiring all public and commercial facilities to make reasonable accommodations to render property accessible to persons with disabilities

Management agreement

a written agreement that governs the relationship between the property owner/investor and the property manager, and outlines the duties of the property manager

1031 exchange is also called

like kind exchange or tax deferred exchange

effective gross income

potential gross income, minus a figure for vacancy and collection losses

capital gain

profit made from an investment

tax shelter

property or other investments that give owners certain income tax advantages, such as deductions for property taxes, mortgage interest, and depreciation

straight line depreciation

simple depreciation method that takes the total cost of a building and divides that by the number of years the building is expected to be useful

liquidity

the ability to convert an asset into cash quickly without the loss of principal

debt service

the amount of money paid in regular intervals toward reducing the principal and interest owed on a debt.

Cash on Cash return

the bottom line of any investment expressed as a percentage by dividing the investment's cash flow by the deposit and settlement costs.

leverage

the effect borrowed funds have on investment returns

tax depreciation

the expensing of the cost of business or investment property over a set number of years, determined by the IRS to be an asset's useful life (27 1/2 years for residential property; 39 years for commercial property)

Return on investment (ROI)

the gain/profit an investor experiences from an investment relative to its cost

Before tax cash flow

the gross amount of income available before taking taxes into consideration

appreciation is

the increase in value of an asset over time

cash flow

the measure of cash inflow and outflow from an investment. Positive cash flow means more money is coming into the business than is leaving it. Negative cash flow is the converse

risk

the probability that events will not occur as expected

Brian owns an office building he wants to sell. Recently, he found a strip mall across town that he would like to buy. Can he avoid paying capital gains tax on the sale of the office building if he buys the strip mall? yes or no

yes this is called a like kind exchange.

Lucy has been applying every annual bonus she gets from work to the principal on her mortgage. Consequently, she pays off her 20 year mortgage in 17 years. Her lender charges her a prepayment penalty fee. Can she deduct that fee from her income tax? yes or no

yes. if a lender charges a penalty for paying off a mortgage early, that penalty amount id deductible

Liz is getting ready to sell her house and has no idea what it might sell for. Before listing, Liz checks the county clerk's office and sees that a house next door, which just sold for $220,000, is assessed at $110,000. Her house is assessed at $140,000. Do you think Liz can get a rough estimate of how much she might be able to ask for her house from this info? yes or no

yes. she should be able to see that the market value of the home is about double its assessed value, which means that the level of assessment is 50% of full market value. This could give her a rough estimate of her home's market value

Ad valorem refers to a tax that is A. based on the assessed value of property B. charged by the county to transfer a deed when property sells C. a percentage of a property's sale price D. a percentage of someone's income

A

Net operating income minus debt service is equal to A. cash flow B. expenses C. leverage D. rate of return

A

Shankar has a signed contract to sell his apartment building and would like to reinvest the money into a strip mall without paying taxes when the property sells. Which tax code permits him to do this? A. 1031 exchange B. IRs 1040 form C. section 121 of the Taxpayer relief act of 1997 D. Section 267 (b) of the like kind exchange act

A

Which element does NOT figure into the equation to find net operating income? A. debt service B. effective gross income C. expenses D. vacancy losses

A

Identify which properties can qualify as commercial property. select all correct answers A. high rise office building B. multifamily apartment building C. shopping mall D. single family residence

A, B, C, and D. all of these can be considered commercial property

Which actions do you think a property owner could take to increase the NOI? select all that apply A. cutting expenses B. increasing the occupancy C. raising the rent D. refinancing to a lower interest rate

A, B, C.

What is the role of a qualified intermediary? select all correct responses A. prepare documentation B. receive, hold, and distribute funds related to the exchange C. research deeds and titles related to the exchange D. safeguard the assets of each party in the transaction

A,B, D. qualified intermediaries are not required to be bonded, insured, licensed, audited, or regulated nor do they have any involvement with deeds and titles

Which of the following circumstances are exceptions to the two year provision of Section 121 of the Taxpayer Relief Act of 1997? select all that apply A. change in place of employment B. disaster C. divorce D. health considerations E. marriage

A,B,C and D

Investor Amy bought a duplex for $115,200. Each unit rents for $800 a month. She assumes a 5% vacancy/collection loss annually and has no additional income sources on the property. The annual operating expenses for the property (management, maintenance, insurance, taxes) total $9,600. What is the NOI? A. 8,640 B. 9,120 C. 9,600 D. 10,080

A. Each unit rents for 800 a month, making the annual PGI 19,200 (800 x 2 units x 12 months). She assumes a 5% vacancy/ collection loss annually (19,200 x 0.05 = 960), making the effective gross income 18,240 (19,200 - 960). Subtract the annual operating expenses from the EGI to find the net operating income. 18,240 - 9,600 = 8,640

Last year, a new plant was built in a rural area, bringing many workers. The area had few retail storefronts to provide services, and lease rates were very high. In time, developers began constructing much needed retail space. As the supply of retail space in the area rises, what would you expect to happen to lease rates in the area in the short term? A. lease rates should fall slightly from their high points B. lease rates should not be affected C. lease rates will continue to rise D. it's not possible to predict

A. the law of supply and demand tells us that lease rates should fall slightly from their high points as the supply of retail space in the area rises

A property that houses a research and development facility is typically categorized as A. industrial property B. mixed use property C. office property D. retail property

A

A property is appraised at $175,000 and assessed for tax purposes at 50% of value. What are the semi annual taxes if the tax rate is $65 per $1,000? A. $1,137.50 B. $2,843.75 C. $5,687.50 D. $11,375.00

B

LLC investments owns a building with two specialty stores on the first floor, class B office space on the second floor, and a loft apartment on the top floor. This is an example of A. industrial property B. mixed use property C. office property D. retail property

B

Mark is purchasing a new home for $300,000. He is making a 20% down payment. What is Mark's equity in his new home? A. $0 B. $60,000 C. $240,000 D. $300,000

B

Investor Betty borrows money from a bank to purchase a small office building. She is able to make the mortgage payments from the rent generated by the leases and still realize a profit. This is an example of what financing concept? A. appreciation B. leverage C. liquidity D. marketability

B. leverage is the use of other people's money to make money

If William and Liz sold the property for $165,000, they would NOT have to pay capital gains tax on their net proceeds because it's below the $500,000 limit for married couples (assuming that they have not claimed that exemption in the past two years) true or false

False.

Investors Mr. and Mrs. Smith sell a rental property, making $185,000 profit. They would NOT have to pay capital gains tax on their net proceeds because it's below the $500,000 limit for married couples. true or false

false. while up to $500,000 of gain is tax free for married couples every two years, this applies only to a principal residence. They were selling rental property, so that exemption does not apply

public accommodation

a facility that is owned, leased, leased to, or operated by a private entity

home acquisition debt

a loan that a taxpayer takes out to buy, build, or substantially improve a qualified home

home equity debt

a loan that does not qualify as home acquisition debt but is secured by a qualified home

depreciation

a loss in value of a piece of property for any reason

Pro forma statement

a schedule of the projected income and expenses for a real estate investment over a given period

net operating income

income after expenses. also called NOI

Lindsey sold her house a year ago and bought a new one when she transferred to a new job. She did not pay capital gains taxes on her old home. Lindsey just learned she is very ill and will soon not be able to care for herself. She wants to sell her house and move back home to be closer to her family. Will she have to pay capital gains taxes when she sells her house? yes or no

no

Francois wants to sell a warehouse he owns in Seattle and buy a strip mall in Vancouver, BC. Is this transaction eligible as a like kind exchange? yes or no

no. any investment property can be exchanged for any other investment property, except when property in the United States is exchanged for foreign property

Frank is tired of living in the city and wants to move. Frank decides to sell his Manhattan condo and buy a little cottage in the mountains. Would this transaction be eligible as a like kind exchange? yes or no

no. to be eligible under section 1031, only business or investment properties can be involved

return of investment

the protection of an investors equity in an investment

Potential gross income

the total of the rent that could be collected before losses are subtracted and miscellaneous income is added

assessed value is

the value placed on a property by a taxing authority for the purpose of taxation. With real estate, this value is usually a fraction of true value

The principal that an investor pays on a mortgage is an example of using leverage to build equity. true or false

true

The advantage of a home equity loan over credit card debt is that interest is tax deductible. true or false

true. one reason people often consolidate other debts into a home equity loan is to write off the interest paid

Mark lives in a village where the assessment rate is 40%. His house was determined to have market value of $200,000, so the assessed value of his property is $80,000. true or false

true. the assessment is 40% of the market value of $200,000 or $80,000

operating statement

used by the current owner and illustrates total revenues generated for a given period based on rent rolls and management style.

John has his investment dollars tied up in a number of different outlets. He's bored with his portfolio and wants to find something new that interests him. Of these, which would LEAST LIKELY be an exchange that would allow him to defer capital gains taxes? A. a beet farm for a silver mine B. a plane for a sculpture C. a shopping mall for an apartment building D. a stallion for a mare

D

Philip bought an office building several years ago for $195,000. He just sold it for $265,000 and bought an apartment building for $270,000 as part of a 1031 exchange. When will Phillip have to pay capital gains taxes? A. never, by making the exchange, he avoids any capital gains taxes B. now that he sold the office building, but only for the $5,000 difference C. now that he sold the office building, since this was not a like kind exchange D. when he sells the apartment building, assuming he does not exchange it for another property

D

Ad valorem means

a Latin phrase meaning "according to value"; used to refer to taxes assessed on the value of property

What is a 1031 Exchange?

The internal revenue code section that allows a taxpayer to sell an investment property and purchase another investment property in its place without paying capital gains on the proceeds from the sale. also called like kind exchange or tax deferred exchange

market value

The theoretical price that a piece of property would bring if placed on the open market for a reasonable period of time, with a buyer willing (but not forced) to buy, and a seller willing (but not forced) to sell, if both buyer and seller were fully informed as to possible use of the land.

In January, Mary moved for a new job. She used the section 121 provisions to avoid taxable gain on her home. Mary commutes 35 miles every day for work. The following March, she gets a new job in another town 110 miles from her home. Can Mary invoke the Section 121 provisions even though her last move was less than two years ago? yes or no

Yes since the commuting miles were greater than 50

improvements

addition to real property; can be natural, but usually they are man made; substantial fixtures, such as buildings

Mill

an amount equal to one tenth of one cent, used in expressing tax rates

equity

an owner's unencumbered interest in property; the difference between the value of the property and the liens against it

A single family residence that is converted into a doctor's office is categorized as mixed use space true or false

false. a single family residence that is converted into a doctor's office is considered to be office space

Property taxes are based on how much money a person earns. true or false

false. property taxes are ad valorem taxes, which means they are based on how much a property is worth

Real property taxes are administered by the state true or false

false. property taxes are administered locally. States do no generally benefit directly from property tax

the role of an assessor is to determine the amount of property tax due. true or false

false. the assessor does not determine the tax that is due. an assessor assigns an assessed value to each property in order to proportion the tax burden fairly

vacancy and collection losses

estimate of how much future income may be lost when a building isnt full or tenant dont pay the rent

boot

extra, non like kind property that can be a part of a like kind exchange to make up for pricing disparity between like kind properties.